Is Donald Trump right about China and the TPP?

June 3, 2016 | Kim Iskyan

Last November, U.S. presidential candidate Donald Trump said, “The TPP [Trans-Pacific Partnership] is a horrible deal… It’s a deal that was designed for China to come in, as they always do, through the back door and totally take advantage of everyone.”

Trump might be on to something. China will be able to take advantage of one of the biggest free trade deals ever. And it’s going to do it through the back door – as China isn’t part of the TPP.

The TPP, which started to be negotiated back in 2006, is a free trade agreement involving 12 countries including the U.S., Japan, Singapore, Malaysia and Vietnam. All together, these 12 countries account for approximately 40 percent of world GDP and 25 percent of global exports. The World Bank estimates the agreement could raise GDP by an average of 1.1 percent in each country by 2030.

In this U.S. election season, China is a political punching bag. And some people think that the TPP was orchestrated by the U.S. in part to keep China from overtaking it as the number one economy in the world.

But the TPP isn’t popular in the U.S., or with either of the people who are candidates to be the next president of the United States. Donald Trump has said he’ll scrap the deal. Hillary Clinton, who negotiated the TPP when she was the top American diplomat, has said that she wants to improve on the deal, and will likely try to change it.

In order for the deal to be approved in the U.S., it needs to be debated and passed in the U.S. House of Representatives and in the U.S. Senate. President Obama hopes to have the deal approved by Congress before the end of the year. But because it’s an election year, the deal may not be approved until after the November elections.

Recent estimates suggest that China will miss out on US$46 billion in investments and trade per year because it’s being left out of the TPP. But the reality is that China has established several free trade agreements (FTAs) that will allow it to grow without the TPP – and, most critically, some of these deals are with countries that are part of the TPP.

In fact, over the past decade China has developed FTAs with nearly all members of the TPP. In 2006, it signed free trade agreements with Australia and Chile. In 2008, New Zealand and Singapore signed FTAs with China. In 2015, China and ASEAN (Association of South East Asian Nations), which includes TPP members Malaysia, Vietnam and Brunei, struck a trade deal.

What this means is that China has its own side deals with at least 8 of the 12 TPP members. These arrangements aren’t as comprehensive as the TPP, by any stretch. But they are a solid foundation. And because of these, China’s exclusion from the TPP matters less than it would otherwise.

Besides this, the TPP of course does not exclude China from investing in TPP members’ companies. Under the terms of the TPP, a third-party country can invest in, and be involved in the business transactions, of a business located in a TPP member country.

This could help explain why there was a 353 percent increase in Chinese investment into ASEAN countries during the TPP negotiations (from 2006 to 2014).

A good example of this is the surge of Chinese investment in Yun Zhong Industrial Park, in northern Vietnam’s Bac Giang province. So far, China has invested nearly US$1 billion in this one industrial park. And eight of the thirteen companies set up there are from China.
China is also involved in trade deals involving multiple countries that could nearly match the TPP in size.

For instance, China is a leading member of the Regional Comprehensive Economic Partnership (RCEP). This is a trade agreement between the 10 ASEAN countries and the six countries with which ASEAN has existing FTAs – this includes China and TPP members Australia, Japan and New Zealand. This deal is still being negotiated.

China is also developing the One-Belt, One-Road initiative, which is an effort to re-create a modern-day Silk Road. The infrastructure proposed as part of it would more tightly connect the continent of Asia to Europe and parts of Africa. It is estimated that it will end up costing about US$8 trillion. It will allow China to trade more easily with the majority of the world’s population.

To help fund its efforts, China established the Asian Infrastructure Investment Bank (AIIB). The AIIB is designed to rival the World Bank (headquartered in Washington D.C., and widely viewed as a tool of the west). By having a big pool of funds to direct lending to needy countries, China anticipates that it will be able to significantly expand its reach. The AIIB has 57 signatories, including a range of traditional U.S. allies. (The only major countries who haven’t signed are the U.S. and Japan).

China isn’t too worried about being left out of the TPP. Its many trade agreements – with the very countries included in the TPP – keep it insulated from the negative effects of the deal. And it will likely benefit from it via the back door – just like Trump and other opponents of the deal have been saying all along.

Kim Iskyan

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.

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